In recent years, finance has taken a
lot of criticism. Witness the passionate but unfocused demands by
Occupy Wall Street in 2011, the recent calls by presidential
candidates to “break up the banks” and Brexit’s thumb in the
eye of London financiers. As current as these events seem, history
tells us that criticizing finance and seeking to control it is as old
as civilization itself. In the 24th century BCE Sumerian
King Urukagina instituted
a number of populist reforms in the city of Lagash, the first of
which was financial: he “ freed the inhabitants
of Lagash from usury.”

It is no coincidence that 4,400 years
ago the world’s first cities had financiers. Financial tools serve
the complex, inter-temporal needs of urban society. Our ambiguity
about finance – the need to reign it in, as well as the need to
constantly develop it – derives from its great power as a
technology. It is a constellation of tools, techniques and
institutions that addressed the fundamental problems that emerged
with the increasing complexity of human society. As the world
changes, finance adapts.

For example, even as we debate the
relevance and usefulness of traditional financial institutions such
as banks, another revolution is underway in the world of money. A
mere decade after we thought we had mastered the intricacies of asset
securitization, shadow banking and credit default swaps, an entirely
new financial phenomenon has emerged. It is called FinTech – short
for financial technology. FinTech involves the plumbing and wiring
of the financial system. It is changing how we borrow, how we
save, how we raise money for companies even how we assess our future;
its possibilities, risks and relationships.

Some of these innovations you may
already know: PayPal, Bitcoin, Financial Engines, Kickstarter,
Prosper.com and Venmo. They are apps, payment systems, crowdfunding
vehicles and peer to peer lending sites. Their use has spread
rapidly along with other technological improvements in how we get
things done. However these companies are the tip of a very large
iceberg.

Many of the innovations in finance are
buried in the complex, business to business infrastructure of the
economy. These include new ways of detecting fraud, recording
transactions, routing orders, valuing assets and even discovering
hidden patterns in big data; massaging the fast, continuous flow of
news, trades, tweets, satellite images, and Facebook posts.
Financial companies – from the big players like Goldman Sachs and
Blackrock down to your local bank and financial advisor believe
FinTech will fundamentally alter their businesses -- and they are
rushing to get out ahead of competitors. This is because FinTech
innovation tends to disrupt the existing structure. It
disintermediates customers and providers of financial services,
replacing them with peer-to-peer lending, instant money transfers,
loans without loan officers, and investment without investment banks.
These innovations are transformative, empowering and create a new
infrastructure for exploring even greater opportunities but they
threaten the status quo in ways that the securitization wave of the
2000’s never approached. Securitization mostly involved the same
big players that ruled the markets in prior decades. FinTech brings
a different cast of characters who are defining new communities of
investors, new sources of knowledge and unfortunately new kinds of
scams and risks. The top FinTech companies today include a lot of
new names. How many of us have been following the likes of Credit
Karma, Market Axcess, Square, Stripe and SoFi?

While it may seem new, the FinTech
revolution has actually been with us for a long, long time. The
first FinTech appeared 5,000 years ago with the invention of writing
on clay tablets in the ancient Near East. The world’s first
written language – cuneiform – was invented for financial
record-keeping, accounting and contracting. It arose in the first
big cities in what is now Iraq. These urban societies had to solve
complex economic problems such as feeding large populations,
coordinating labor with specialized skills and trading great
distances for essential commodities.

These problems required planning for
the future. The world’s first FinTech developed from an accounting
and contracting system into a tool of sophisticated communication and
analysis precisely to address the complexities of a new way of living
– cities in which it was impossible to know and trust everyone;
where people had to rely on others for daily food supply, and where
the specialization of tasks and trade all but eliminated the
possibility of self-sufficiency. Evidently, financial tools such as
money lending also led to serious social tensions as well.
Urukagina’s freeing of the people of Lagash from moneylenders may
have been literal. Debt-slavery was common in ancient Mesopotamia.

The essence of finance is the transfer
of value through time and the re-organization of risk. Finance is a
time machine – a tool of the fourth dimension. Large-scale urban
society demanded new kinds of systems; not just canals, pottery and
bronze weapons but ways to plan and contract for future needs, a
means of taxation and markets for goods and labor. The ancient
Mesopotamians invented tools for all of these things and more. The
tools of finance included writing, mathematics and money, what I call
the hardware of financial technology. It also demanded software –
the abstract conceptualization of time and risk in forms that did not
exist before. Financial thinking was an “add-on” mode of
thought that still feels a bit uncomfortable to many of us today.

Financial history over the 5,000 years
since its invention tells us the how and why of FinTech revolutions.
When society changes in fundamental ways its financial
infrastructure has to catch up. For example, the first stock market
was the Amsterdam Exchange in the early 1600’s. Brokers traded
shares in the Dutch East India Company – a strikingly innovative
business that transformed the Netherlands into a global maritime
empire. The trade in its shares became a way for the Dutch to
broadly distribute the benefits of the new trade with Asia. Dutch
society literally “bought-in” to globalization through ownership
and free exchange of claims on the new company. Within a century,
this financial innovation spread through Europe and led to further
FinTech innovations including, most famously the world’s first
global stock market crash. When technology changes, the consequences
can be dramatic, surprising and swift – and not always welcome.
The first global stock market crash occurred in 1720 immediately
after a bout of speculative exuberance about trans-Atlantic trade.
This episode is still a prime example of how financial dreams can
activate widespread human folly.

Despite such growing pains, FinTech has
added much to society. Above all else, it has democratized capital.
Absent finance, a person with a good idea and no money could not
start a business. A financial infrastructure that can channel
investment from those with wealth to those with ideas solves this
problem. In so doing it creates the conditions for dramatic economic
growth. By the same token, the invention of investments like bonds,
stocks and mutual funds allowed passive investors to earn and save.
These new instruments yielded dividends that children or those who
cannot work could rely on. They separated the capacity for work from
the ability to support oneself. These same tools have become the
foundation for the world’s greatest – if unfinished – social
project; the creation of pension systems to insure a humane economic
future for all.

Sometimes FinTech takes one step
forward and two steps back. The recent transformation of the savings
systems to self-directed plans that demand that each of us calculate
what we need to save and implement in our personal accounts is one
such backward step. This great risk shift has put the burden of
financial management on families, and necessitated a profound
re-alignment of financial technology. The mutual fund sector –
itself a wonderful financial innovation – grew astronomically in
the 1990’s with the demand for direct investment in money
management and the awareness of diversification as an essential tool
for risk reduction. With this shift came a need to understand fees,
oversight to prevent fraud, and access to financial information. It
is not clear all of us mastered this challenge equally well.

The Internet was always going to change
the way finance worked. It disintermediated traditional news
services, it created information networks and new communities that
share ideas. It created a new sense of fairness in terms of access to
information. It changed the way services are marketed. As we speak,
today’s FinTech lets me manage my retirement, pay my bills, mind
risks, find fleeting investments and labor opportunities, shop for
property and get a mortgage all through my smartphone. The
important thing to realize is that FinTech is not really as new as we
think. Civilization constantly invents new financial infrastructure
to keep up with society’s increasing complexity.